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SCMP Reporter

Reliance on equities lifts earnings

Mainland-listed companies' hefty first-half earnings growth might bode ill for the stock market outlook as a correct reading of the balance sheets showed that the profits were partly spurred by one-time gains that would be tough to match next year, analysts said.

'Their earnings are in line with expectations,' said GF Securities analyst Wu Youhui. 'The question is whether the companies can maintain that  momentum next year.'

As of August 29, 1,366 of the mainland's 1,478  A-share firms  that had published first-half earnings showed a combined profit of 300.8 billion yuan,  a 66.7 per cent growth in  earnings per share, China Securities Journal reported yesterday.

'The extraordinary gains are still an X factor because you don't  know if  the equities market can  chalk up similar heavy gains [next year],' Mr Wu said. 'This year's first-half growth was rare and it won't be repeated.'

The benchmark Shanghai Composite Index grew 42.8 per cent in the first half this year, bringing a windfall of 115 billion yuan to the listed companies that speculated on the stock market, according to Wind Information, a  financial data provider.

'There's a smokescreen over the earnings,' said Jerry Lou, Morgan Stanley's mainland  equity strategist. 'Retail investors just can't see through.'

Taking out one-time investment gains and non-operational returns, the per-share earnings growth was 41 per cent, a Morgan Stanley research note shows.

Among the top beneficiaries, Ningbo Younger, the garment maker, made 94 per cent of its first-half profit from one-time deals.

Mainland investors have pinned their rally hopes on earnings growth, betting  breakneck economic growth will improve companies' performances. The growth  also makes their stocks appear less expensive.

The boldest prediction among investors and analysts is that the benchmark Shanghai Composite Index would jump another 5,000 points to 10,000 next year.

'The hopes come down to  whether the companies can post the same handsome earnings growth next year,' said  Zhang Yang, an analyst at Orient Securities. 'That will be an egg-and-chicken problem.'

For one thing, listed companies will not  be able to generate the same heavy  incomes if the market does not move at a similar  pace.

On the other hand, their core business cannot support a surging index  without the extraordinary gains those investments bring.

The Morgan Stanley report echoes worries voiced by  China Securities Regulatory Commission chief researcher Qi Bin who on Wednesday said that the mainland's public companies were focused on stock speculation rather than core business.

This year's high base also would  make it difficult for firms to post similar growth rates next year, analysts said.

The central bank has raised interest rates  four times this year to cool  soaring consumer prices. Tighter policy  would further hamper firms  from expanding quickly,  Mr Wu said.



Mainland firms'  profit surge hard  to beat next year